Over-Mythologizing the Fed
Powell as the Hero?
'Will it or won't it' is the Fed question du jour… again.
Later this month the Fed will be back to playing interest rate roulette, deciding whether to hold steady or lob in another increase.
It seems like almost everybody is betting on an increase, followed by maybe another. Of course, everybody has been wrong before.
I was thinking about this the other day after reading an essay on LinkedIn by Jon Hilsenrath titled, “Why I’m Bullish.”
Jon’s not just another guy spouting off...
As the former economics editor of the Wall Street Journal, who also used to follow the Fed, he has better insight than most. And Jon has no axe to grind, other than the kind of interpretation that comes from years reporting, writing and editing. He also wrote the book, Yellen: The Trailblazing Economist Who Navigated an Era of Upheaval. And he happens to be a nice guy. (Full disclosure: He edited a bunch of my columns when they appeared in the WSJ. Poor guy drew the short straw!)
On this issue of what the Fed does next…
Jon’s view is that next week’s report of the Consumer Price Index is likely to show that inflation fell into the low 3% range last month. In other words, if he’s right, he believes it mean the Fed is closer to reaching its goal than it is prepared to admit. The good news, in that case, is that it might be in a position to stop raising rates sooner than the market expects.
The bad news… the Fed very well might overdo it. Or as Jon explained in his essay...
Federal Reserve officials keep telling investors they expect to raise short-term interest rates two more times this year to ensure they’ve killed inflation. They might not need to, and that’s why stocks are rising.
And if you’re wondering, Jon is still bullish after today’s jobs report that suggest the job market is slowing but not contracting.
Of course, in this “follow the bouncing ball” deluge of economic data, that follow’s yesterday’s report that showed just the opposite for private employers. Jon to me this morning, before he he published a follow-up…
Rising wages are GOOD as long as inflation cools. It bugs me when people say it's bad that wages are rising. It is a good thing in its own right, as long as inflation isn't going up, and right now inflation is clearly slowing. Rising wages might be a sign that worker productivity is rising.
Never mind about whether we are, were or will soon be in a recession. We’ve supposedly been on the verge of one for more than a year.
Who knows… maybe the WSJ's Justin Lahart had it right when he dubbed it a "richcession."
That might help explain why a trip I recently returned from on a high-end cruise line, with capacity of 600 people, wasn’t entirely full – and that’s even with 140 passengers (as I later learned) who had been deeply discounted.
That group included more than a few who have never likely gone on this kind of ship… and likely would never return at full price. (The guy complaining loudly that there weren't any buffets at dinner was the dead giveaway. That’s not something you’ll generally find, at dinner, on this kind of ship.)
More telling was that the trips immediately before and after ours were roughly half full.
Which gets me back to what Jon wrote in his essay...
After reading his piece we went back and forth in the comments section. What Jon said there could easily have been the core of another essay, especially his comments on the Fed…
My belief is that if we get a recession it will be because the Fed overdid it unnecessarily. An inverted yield curve means the market believes the Fed will cut rates.
What it doesn’t tell you is why.
Typically, it cuts because it HAS TO because of recession. This might be a case where it cuts because it CAN, because inflation really was transitory after all.
I don’t see a compelling reason why the Fed can’t play a wait-and-see game and make decisions on a quarterly basis, i.e., the market’s obsession with a “skip” is just more silly market psychology that make’s the Fed’s job harder.
A lot of [Fed Chair Jerome] Powell’s rhetoric right now is designed to keep the market from getting ahead of itself. He’s like a jockey who’s pulling a horse back because he fears if he lets the reins go the horse will run too hard and throw him off.
We’ll know a lot more - including whether I’m dead wrong - by July 12 [when the CPI is released.]
As I responded...
The part of all this that still baffles me is that after all of these years and cycles and different Fed heads, you would think they would know what they're doing.
But I'm guessing the politicization of the Fed, if that indeed has increased, is part of it.
Let's never forget that Trump would hail the market's rise as a mark of his true genius. Would you want to be running the Fed in the face of that? Covid, of course, changed everything, which gets us to where we are today.
Separately, I would have to think that the Fed has the best AI of anybody to slice/dice/maneuver/predict what could happen under all circumstances.
Of course, maybe I'm overthinking it because, after all, they're just people.
And as Jon shot back...
I think people over mythologize the Fed.
They have a 2% inflation target and they’ll get the economy near it. The only question is at what cost and when.
They deserve a pass for early Covid. Nobody knew what the hell was going on and they helped to avert an even-worse disaster. (It already was a disaster because millions of people died.)
They’ve made some mistakes since then, but I think Powell has a chance to go down as the person who cemented the Fed’s inflation-fighting credibility after getting the diagnosis and prescription of Covid badly wrong.
Powell as the hero? Now there’s some Fed mythology for you. Then again, former Fed Chair Paul Volcker was the villain… until he became a legend.
DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts, and should not be construed as investment advice.
(I write two investment newsletters for Empire Financial Research, Empire Real Wealth and Herb Greenberg’s Quant-X System. For more information, click here and here.)
Feel free to contact me at herbgreenberg@substack.com. You can follow me on Twitter and Threads @herbgreenberg.
Clearly a thankless job, but running the Fed is never a popularity contest. They are supposed to be the adult supervision in the room. Navigating Covid was a huge challenge, kudos for getting thru it, but at what cost? The "K" economy has never been wider and the kick-the-can approach must - and will - end one way or another. Respect the cycle.